2015-08-25

Chinese Govt Agencies Expect USDCNY to Fall to 7 in 2015; 8 in 2015

Some Chinese agencies involved in economic affairs have begun to assume in their research that the yuan will weaken to 7 to the dollar by the end of the year, said people familiar with the matter.

The research further factors in the yuan falling to 8 to the dollar by the end of 2016, according to the people, who asked not to be identified because the studies haven’t been made public. Those projections -- which suggest a depreciation of more than 8 percent by Dec. 31 and about 20 percent by the end of 2016 -- were adopted after the currency was devalued this month and compare with analysts’ forecasts for the yuan to reach 6.5 to the dollar by the end of this year.

If this pace were to keep up and the relationship between the drop in reserves and the drop in the yuan to remain roughly proportional, a year end target for the yuan would be 6.8 per dollar, but financial markets aren't linear. A further drop in reserves will eventually trigger a bigger drop in the yuan. I'd expect markets to push it much closer to, or beyond, 7 yuan per dollar if reserves end the year closer to $3 trillion.

The government targets are reasonable, but you have to wonder where the financial markets might take the yuan given their predilection for overshooting the target.